WILLS VS. TRUSTS PICKING THE RIGHT PLAN FOR YOUR FAMILY

??????????? A Will and a Trust can both be used to pass assets to a Decedent’s beneficiaries after he or she passes away.? However, there are important differences in how these two instruments work and how the assets are managed and administered due to the fact that a Will must be probated while a Trust does not.? In some states, the probate process is extremely expensive and time consuming, so in those states most people will use a Trust to avoid probate, as that one factor tends to outweigh all of the others.? Texas, however, has a very straightforward probate process, so many clients choose to use a Will rather than a Trust.? So how do you know which is best?? The answer depends on the type of assets you own, the needs of the beneficiaries, family dynamics, and personal preference.?

The Probate Process

??????????? First, to determine whether or Will or a Trust is best for you, it is important to understand what probate is and what assets are actually subject to probate when someone passes away.? Simply put, probate is the legal process used when someone dies to wind-up the Decedent’s affairs, pay all of the Decedent’s outstanding debts and obligations, and retitle and transfer the Decedent’s remaining assets from his or her individual name into the names of his or her beneficiaries.?

??????????? The only assets that must be probated are assets owned in the name of the Decedent when he or she passed away that did not otherwise transfer to beneficiaries via beneficiary designations (which are called “non-probate transfers”). Therefore, if a beneficiary has been designated for an asset via a payable on death designation (POD), a transfer on death designation (TOD), or beneficiary designation (such as with life insurance, IRAs, 401ks, etc.), such asset will pass to the named beneficiary without the need for probate. Similarly, assets owned jointly with another person which are designated as being held “with rights of survivorship” will pass to the co-owner without the need for probate.[1]? As a result, some clients are able to reduce the number of assets subject to probate by simply naming beneficiaries to receive their assets on their death.? However, there are significant risks to using beneficiary designations alone, because if just one beneficiary predeceases you or is incapacitated at the time of your death, it will upend the planning and can dramatically increase the costs if no contingency planning has been done.? As a result, clients should always have at least a basic Will to cover such contingencies.

How a Will Works

??????????? A Will is a legal document that sets forth to whom a person wishes to leave his or her assets when they pass away and designates a person or entity to manage and distribute the estate in accordance with its terms (who is called the “Executor” in Texas).? A Will requires a number of formalities in order to be valid in Texas.? A Will must be executed in front of two witnesses and a notary who are all present together at the same time when the “Testator” (the person making a Will) signs the instrument.[2]?

??????????? Upon the Testator’s death, the Will is filed with the probate court in the county where the Testator resided at death, and the court will examine the Will to make certain it meets all legal requirements.? If it does, the court will set a hearing to appoint the Executor named in the Will who will need to appear at the hearing and testify.? Depending on the county, it will generally take several months for a hearing and for the Executor to be appointed.? Once appointed by the court, if the Will calls for “independent administration,” after filing an inventory with the court, the Executor may administer the estate without further court supervision or approval.? The Executor then winds-up the Decedent’s final affairs, including providing notice to creditors and beneficiaries, paying any properly filed claims, and filing the Decedent’s final tax return.? Once all taxes and valid claims have been paid and there is no need for further administration, the Executor may distribute the remaining assets to the beneficiaries named in the Will in accordance with its terms.?????

??????????? Other states have very different requirements, and probate can take several years in some states.? In Texas, however, uncontested estates are usually able to complete the court process in a few months rather than a few years.? As a result, avoiding probate in Texas is not nearly as much of a concern as in other states, and many clients only need a Will which functions well for the purpose of passing assets to their heirs.?

How a Trust Works

??????????? A Trust is a private agreement between the “Grantor” (the person establishing the Trust who is sometimes also referred to as the “Settlor” or “Trustor”) and the “Trustee” (the person managing the Trust) who controls the management and distribution of the Trust assets for the benefit of one or more “beneficiaries.” ?The most common way to create a Trust is by executing a Trust Agreement which sets forth the beneficiaries of the Trust, appoints a Trustee who will manage the Trust, and sets out the terms of how the Trust will be administered, including when and for what purposes distributions can be made.? A Trust does not require witnesses and is typically signed in front of a notary, although a notary is not legally required.?

??????????? There are many types of Trusts which are used for many different reasons.? Trusts can be either revocable or irrevocable.? Irrevocable Trusts are often used in estate tax planning to make lifetime gifts to minor children to reduce the size of the Grantor’s estate for tax purposes or to hold life insurance to cover estate taxes, and they can be extremely complex. ?Special needs trust are also generally irrevocable in order to comply with Medicaid rules and regularions. However, irrevocable Trusts are only used in limited situations due to the fact that once established, changes and amendments are not permitted which can lead to unanticipated and sometimes catastrophic results if unexpected circumstances arise many years in the future.

??????????? A Trust can be created and funded by a Will upon the Decedent’s death, or it can be established during the Grantor’s life.? Trusts created by a Will when a person dies are called “Testamentary Trusts” and require the assets to be probated before they can be transferred to the Trust.? For a Testamentary Trust to be funded (meaning assets are retitled into the name of the Trust), the Executor must first collect all of the Decedent’s assets and administer them in accordance with the statutory probate rules and procedures.? After all creditor claims, taxes and expenses have been paid, the Executor retitles the assets into the name of the Testamentary Trust, and the Trustee designated in the Will to act as such begins managing the assets for the intended beneficiaries.?

??????????? Trusts that are established and funded during the Grantor’s lifetime are called “Inter Vivos” or “Living” Trusts, and they are commonly used to pass assets to a Grantor’s beneficiaries without the need for probate.? As used herein, the term “Trusts” is referencing these types of revocable living trusts which are established during a Grantor’s life as part of an estate plan to manage, hold, or distribute assets to remainder beneficiaries upon the Grantor’s death.? Typically, during the Grantor’s lifetime, the Grantor is the beneficiary as well as the Trustee of the Trust, and the Trust will contain provisions to permit the successor Trustee to manage the assets for the Grantor’s benefit should he or she become incapacitated.? When the Grantor dies, the successor Trustee is able to hold, administer, and distribute the Trust assets to or for the benefit of the beneficiaries in accordance with the terms of the Trust without the need for court involvement.? This allows assets held by the Trust to bypass the probate process and avoid the time and expense associated with same..?

Pros and Cons

??????????? There are important differences in how a Will and Trust work, and it is important for clients to understand these differences in order to decide what type of plan will work best for the client and his or her family.? The following chart summarizes many of the key differences between Wills and Trusts and the pros and cons of each under Texas law.

Conclusion

It is important to understand the pros and cons of the probate process and how a Will differs from a Trust so that you can determine what works best for you and your unique family given the nature of your assets, your beneficiaries and family dynamics, and personal preference.? At Austin Special Needs Planning, we would be delighted to answer any questions you may have and work with you in developing and implementing an estate plan that is tailored to fit you and your family.

[1] It is important to note that in Texas a homestead does not automatically pass to a surviving spouse unless titled as “husband and wife with rights of survivorship.”

[2] Texas also recognizes holographic Wills, which are Wills written entirely in the Testator’s handwriting and signed by the Testator; however, they are expensive to probate as a handwriting expert is often required.?

[3] HHSC (the agency which administers Medicaid in Texas), has interpreted the applicable federal regulation to mean a home is only exempt if owned by an individual and that it becomes an available resource if held by such person’s revocable living trust.? This interpretation has not been adopted by other states and only applies to eligibility for Medicaid in the state of Texas.? State real property tax exemptions, including exemptions based on an individual’s military service, age, or use of the property (homestead, agriculture, and the like) will generally apply equally to an individual and a revocable living trust.

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